Extending the Offshore Outsourcing Service Portfolio

Transcription

1 doi: /j.emj European Management Journal Vol. 23, No. 2, pp , 2005 Ó 2005 Elsevier Ltd. All rights reserved. Printed in Great Britain $30.00 From Application Outsourcing to Infrastructure Management: Extending the Offshore Outsourcing Service Portfolio ERIK BEULEN, Tilburg University PAUL VAN FENEMA, Erasmus University, Rotterdam WENDY CURRIE, Warwick Business School Offshore Outsourcing is an increasing IS/IT strategy that relies on third party Service Providers typically located in developing, low wage countries. The scale and scope is extending from traditional application development activities to embrace infrastructure management. It poses additional risks on both Service Recipients and Providers, which need to be carefully evaluated and assessed. In this paper, we convey the results from case-based research into three firms. Firms seeking to offshore infrastructure management need to develop effective risk mitigation strategies for selecting service providers. Therefore it will become increasingly necessary for Service Providers to develop offshore outsourcing capabilities. Ó 2005 Elsevier Ltd. All rights reserved. Keywords: Offshore outsourcing, Application development, Infrastructure management Introduction For most Western European and North American multinationals, offshore outsourcing has become an essential component of their long-term IS/IT strategy. Since the late 1980s and early 1990s, offshore outsourcing has enabled countries like India to expect revenues of between $8-10bn by 2002 (Nasscom.org). Analysts predict double-digit growth rates for offshore outsourcing over the next decade (Marriot, 2003; Kakabadse and Kakabadse, 2002). These figures are considerable given that the IT outsourcing market in North America alone is estimated to be $125 billion in 2004 (Palvia, 2002). Key drivers for offshoring are cost savings and globalisation (Carmel, 1999). For offshore infrastructure management quality is still a concern for most of the managers in developed countries (Caldwell European Management Journal Vol. 23, No. 2, pp , April

2 et al., 2004). At the same time, offshoring raises new societal issues. White-collar job losses in the developed regions dominate the political agendas in the US and Europe, although some economists tend to emphasize beneficial implications of offshoring. Nevertheless Shell recently announced an engagement with IBM Global Services and Wipro. Also Procter & Gamble and General Motors have offshored substantial parts of their IT services. In terms of sourcing location, currently most of the offshoring services are delivered out of India (Nasscom and McKinsey, 2002). In addition, countries like China have an almost inexhaustible pool of (reasonably) qualified resources available (Dedrick and Kraemer, 2001; Qu and Brockelehurst, 2003). Coupled with this, European countries such as the Czech Republic, Hungary, Ireland, Poland and Russia are also suitable candidates for offshoring (Marriot, 2003). Offshoring will have a major contribution to the economies of these developing countries (Carmel and Agarwal, 2002). Three Types of Offshore Service Providers The type of service provider in part determines the organisational and contractual arrangement of offshore outsourcing. There are three different types of offshore service providers: (1) captive service providers, (2) native service providers and (3) foreign service providers (Carmel and Beulen, 2005, forthcoming). First, captive service providers involve insourcing and are therefore out of the scope of our research. Second, native service providers companies such as Atos Origin, CAP Gemini, CSC, EDS, IBM and Logica CMG provide services from local operations in different developing countries all over the globe while having their headquarters in the developed regions. The native service providers are also called traditional external service providers (Caldwell et al., 2004). Infrastructure management is commonly part of the service portfolio of full service providers in developed countries. These players are different from the third type of foreign offshore providers. The foreign offshore providers are major players in offshore application development such as Cognizant, Tata CS, Wipro, IMR and Xansa. These companies are based mainly in developing countries. Their presence in developed countries is commonly limited to sales offices. These companies are currently exploring opportunities in infrastructure management (see for example and In our research we limit ourselves to the second type, i.e., native service providers. The reason is that the limited maturity of foreign offshore providers at present introduces an additional factor that compounds the analysis of risks and strategies. Offshoring of IT services is no longer limited to application development. Infrastructure management has recently emerged (Ribeiro, 2004; Businessline, 2004a; Businessline, 2004b). A contract in offshore outsourcing partnerships is as essential as in outsourcing relationships. But governance of relationships also requires trust and the implementing structures (Barthelemy, 2003). In both management and research publications offshoring of infrastructure management is not yet clearly described. It therefore requires the development of risk analyses and strategies for both service recipients and service providers. On one hand, some lessons will be similar to current expertise on offshore application development. On the other hand, new risks and strategies are likely to emerge due to the differences between application development and infrastructure management. The objective of this paper is to compare infrastructure management and application development in terms of risks and strategies, and to identify strategies for managing risks associated with infrastructure management. Apart from infrastructure management, there is a trend to offshore entire back office processes such as human resources and finance & accounting to developing countries (McCarthy et al., 2003). Companies such as Ford, General Electric and Intel Corporation are moving their back offices to developing countries (Carmel and Agarwal, 2002). This phenomenon is outside the scope of our research. The paper is structured as follows. We examine current literature to compare the characteristics of application development and infrastructure management. It is followed by a detailed investigation of risks associated with offshore application development. We then introduce our research methodology and results from a research program consisting of multiple case studies focusing on risks and strategies for infrastructure management in offshore outsourcing relationships. The strategies detail ways of working and best practices in infrastructure management in offshore outsourcing relationships. The paper concludes with implications for research and practice. Characteristics of Application Development and Infrastructure Management Application development and infrastructure management have different characteristics along a number of dimensions (Table 1). We elaborate on the two forms of outsourcing in this paragraph. Application Development Application development encapsulates three types of activities. First, it consists of services aimed at 134 European Management Journal Vol. 23, No. 2, pp , April 2005

3 Table 1 Characteristics of Application Development and Infrastructure Management in Offshore Outsourcing Partnerships Characteristics Application Development Infrastructure Management Type of service Project based (<12 month contacts) Continuous services (> = 36 months contracts) Service levels Project deliverables in time Service levels measured continuously for the entire contract period Degree of interaction Dynamics of requirements service provisioning Part of costs of labour related to total costs of service provisioning High frequency of interaction between the service recipient s end users and service provider s IT professionals, due to need for clarification of requirements during the execution of the project High, requirements are often changed during the execution of the project, due to changing requirements in the business Mainly labour related costs Low frequency of interaction between the service recipient s end users and service provider s IT professionals; interaction related to disturbance of service provisioning only Low, requirements are stable during entire contract period Labour related and investment related costs Ability to benchmark Limited to rates used for IT professionals Possible per component (such as price per server or price per managed SAP-seat) Required non-contract specific investments limited to certified service delivery processes For both certified service delivery processes and hardware investments Importance of security Limited to development environment (physical security) Both the service delivery environment (physical security) and the communication (information security) creating enhanced functionality by developing new custom applications, or modifying or enhancing customised or packaged applications. Second, application development includes the integration, detailed design, implementation, and management services to link applications (custom or pre-packaged) to each other and/or with existing or planned information technology infrastructure. Third, the deployment services provided to support the implementation and rollout of new applications can be part of application development (Sadlowski, 1998). As outlined in Table 1, application development is mainly a project-based activity, resulting in the timely completion of project deliverables at dominant service level. As there is no 24/7 communication during the execution of the project the security risks of application development are limited. The duration of most of the contracts in this type of offshore engagements is mostly limited to 12 months (Marriot, 2003). Application development is a discrete service with high levels of interaction with end-users and management of the service recipient because of high dynamics in the service delivery (Faraj and Sproull, 2000). The requirements in application development are often subject to change during the execution of a project (Kraut and Streeter, 1995). It requires a high degree of interaction throughout the project. Service delivery requires limited generic investments of the service provider. Most of the investments are directly linked to the execution of the project and can therefore be charged to the service recipient. Some investments are not directly related to projects, for instance those required for obtaining CMM 1 certification (Gopal et al., 2002). In providing the services for application development, the costs of labour are a substantial part of the total costs of these services (Sadlowski, 1998). Consequently, the possibilities for benchmarking are limited to the rates for IT professionals. Infrastructure Management Infrastructure management can be defined as preventative and remedial services that physically repair or optimise computing and communications hardware. Specific activities include, first, technical troubleshooting and assistance for set-up and all fee-based hardware warranty upgrades. Second, infrastructure management refers to telephone and online troubleshooting, installation assistance and basic usability assistance (operating systems for desktop, network and server, application software for personal productivity, systems and network management software and tools, and utilities). And third, operational services, application management services and helpdesk management services are considered part of infrastructure management (Sadlowski, 1998; Caldwell et al., 2004). Contrary to application development, infrastructure management in offshore outsourcing relationships consist mainly of continuous services with stable requirements (Table 1). The average duration of current contracts is about 36 months. Services are provided 24/7 and the service levels are monitored accordingly. As a result, security is a major issue. The interaction with the end-users and the management of the service recipient is limited in offshore infrastructure management. Services have to be executed according to the contracted service levels. Only in case of disturbance of the service delivery will the European Management Journal Vol. 23, No. 2, pp , April

4 management of the service recipient be involved (Pervan, 1998). The cost of labour as a proportion of the total cost of service provisioning is limited (Sadlowski, 1998). The total cost of the service provisioning is easy to benchmark due to the high degree of comparability of infrastructure management services (Doll et al., 2003). Infrastructure management requires relatively high non-contract specific investments in certification of the service delivery processes and hardware (Weill et al., 2002). An important consideration is therefore how to identify and evaluate the risks associated with both application development and infrastructure management in the context of offshore outsourcing. This is discussed in the following section. Risks in Offshore Application Development Gartner identifies three categories of risks related to, (1) the readiness for offshore outsourcing, (2) the delivery and process, and (3) contracting and business issues (Sinha and Terdiman, 2002). Readiness for offshore outsourcing, and the contracting and business issues are important risks of offshore outsourcing, though they are outside the scope of this research. In this paper, we focus on delivery and process risks which we outline in Table 2. This category of risk covers a range of potential threats and challenges to an offshore outsourcing contract, and must be managed as part of an ongoing process, rather than an immediate quick fix. For example, much has been written about cultural risk factors (Kumar and Palvia, 2002), although these risks are probably the most difficult to define or manage in an ongoing offshore outsourcing relationship. Equally, language and communication difficulties and other humancentred factors are not amenable to simple managerial frameworks and tools. However, socio-economic and political issues must be factored into the overall risk analysis as they are critical to the outcome of offshore outsourcing contracts. Methodology Since the purpose of this research study is to investigate the delivery and process risks of offshore outsourcing, the appropriate research method was to generate exploratory-descriptive case-based studies of offshore outsourcing at selected firms. The research method is useful to elicit data and information from informants with the purpose of building theory Table 2 Delivery and Process Risks of Offshore Outsourcing (Sinha and Terdiman, 2002) Risk Category Cultural Language and communications Different time zones Managing scope changes Human capital Rotating onshore resources Infrastructure Security and privacy Knowledge transfer Understanding of business processes of service recipient Geopolitical risk Size of the offshore outsourced IT service Length of the contract Description of Risk Differences in culture inhabit the offshore outsourcing relationship including national and corporate cultural differences Limited understanding of the language mainly for involved employees who are not native English speakers hinders the service delivery process Interaction between the service recipient and service provider representatives is hindered by time zone differences Changes in the scope of the offshore outsourcing contract impact the service delivery process i.e. uniform service delivery processes and certification support managing change The absence of employees with the right skill set and competencies limits the quality of the service delivery process Due to staff rotation, instability in the team that is responsible for the service delivery process constrains the service delivery process Unstable infrastructure to support the service delivery process hinders the service delivery process including telecommunications and data infrastructure Protecting physical assets and intellectual property to ensure the continuity of the service delivery process Knowledge transfer processes between the service provider and service recipient are essential to the service delivery process. This is impacted by cultural risks, and language and communication risks Limited understanding of the business processes of the service recipient s IT-professionals hinders the service delivery process War, terrorism or internal armed conflicts might disturb the continuity of the service provisioning. Geographical locations have to be in stable regions The size of the contracts has to be substantial for the service provider, to cover the co-ordination costs The length of the contract determines the opportunity for the service provider to cover costs. Long-term contracts result in a lock-in of the service recipient and short-term contracts will not support the implementation of a proper service delivery process by the service provider. Therefore the length of the contract needs to be balanced 136 European Management Journal Vol. 23, No. 2, pp , April 2005

5 rather than testing a particular theory (Myers and Avison, 2002). While there is range of studies on traditional forms of outsourcing, focusing mainly on the relationship between a client and vendor in the same country, there are few studies which explore crossnational collaboration between a service recipient and service provider. Fieldwork for this study was conducted between February 2002 and November Three firms were selected on the basis that they had an offshore outsourcing relationship with a service provider. We discuss the selection of the three firms in the next section, followed by our methods of data collection and analysis. Case Study Selection The firms considered for this research were using infrastructure management services for offshore outsourcing. In selecting case studies we used three criteria. First, we used the size of the offshore outsourcing contract, setting a minimum of at least 10 FTEs with involvement in the service provisioning. Smaller numbers of IT professionals involved in the contract may pose different risks. With larger contracts, IT professionals are more likely to be specialists instead of generalists, since they have clearly defined roles and responsibilities. With smaller contracts, the complexity of different groups and levels of expertise is limited. For this research, we wanted to investigate how clearly delineated roles and responsibilities may become blurred over time. As such, all the firms we investigated had a dedicated contract manager and specialised IT professionals for the different aspects of infrastructure management. Second, we were interested only in service recipients which were receiving the offshore outsourcing services across a number of countries. Only service providers with multiple country service delivery were selected for this study. The complexity of multicountry engagements is bigger and requires more detailed risk analyses and more sophisticated strategies. Three multinational firms were selected, all receiving offshore outsourcing services at business units spanning a number of countries. Third, we selected firms with 100% service delivery from service providers in developing countries to enable us to focus on offshore-related risks. A combined service delivery out of developing and developed countries might impact the risks. Also, the strategies might be influenced by a combined service delivery. Table 3 summarises the characteristics of the three cases. Data Collection and Data Analyses The research study collected both primary and secondary data. Primary data collection was generated by conducting in-depth interviews with a range of personnel, including information managers, contract managers and accounting managers and experts located across the three multinational firms. A protocol for interviewing was developed. Each interview lasted between hours, with three executives interviewed at each firm. A semi-structured questionnaire was used. This research instrument is useful to elicit data and information for exploratory-descriptive studies which may be extended later (Denzin, 1978). All interviews were tape recorded and transcribed. To further crosscheck our data from these interviews, we conducted hours interviews with a further three independent respondents from external organisations in the offshore outsourcing field (Table 4). These interviews were tape recorded and transcribed. These independent respondents held senior advisory and consulting positions. The rationale for conducting additional interviews is for the purpose of triangulation, where data from the case study firms and data from informants from external firms may be compared and contrasted. Secondary data was also gathered to enhance our study. This included company brochures, web-site material, Request for Proposals (RFP) forms, minutes of meetings, contracts and Service Level Agreements Table 3 Investigated Infrastructure Management of Offshore Outsourcing Relationships Characteristics of Case Studies Case 1 Case 2 Case 3 Start of the Contract Size of the Contract 11 FTEs 10 FTEs 38 FTEs Description of the Services Unix system management Unix system management including SAP support Services Application management services and helpdesk management services (third level support) Geographic Area Service Provisioning Poland and India India India Geographic Area Service Usage Service Recipient Global (Belgium, France, Germany, Switzerland and US) Global Consumer Packaged Goods company Europe (France, Germany, Italy, The Netherlands and Spain) Global discrete manufacturing company Global (Australia, Germany, Japan and US) Global Software Product company European Management Journal Vol. 23, No. 2, pp , April

6 Table 4 Expert Background Expert Function Company Profile Years of Experience 1 Senior consultant Consultancy and training firm >20 years 2 Senior manager Consultancy firm >5 years 3 Senior consultant Consultancy firm >10 years (SLAs). Much of this information was available in the public domain, for example, annual reports and press releases or reports. This process of cross-validation of primary (i.e. the themes emerging from the interviews) and secondary data allowed for within method data triangulation and increased interpretive validity (Jick, 1979). We present these findings in two consecutive parts: risks and strategies. As risks have an impact on the strategies we start with identification of risks associated with offshore infrastructure management. The identification is based on and extends prior work on the risks in offshore application development. Building on this analysis, the strategies for offshore infrastructure management address five critical risks of offshore infrastructure management (see cells indicated in light grey in Table 5). Risks in Offshore Outsourcing The risk impact framework is based on the characteristics of application development and infrastructure management in offshore outsourcing relationships, and cross-checked by the expert interviews. In Table 5 the risk impact in offshore outsourcing for application development and infrastructure management is summarised. We define three categories for the delivery and process risks of offshore outsourcing. They are limited, moderate or strong. Risks associated with offshore application development (solid line) are based on our study of current literature in this area. Based on prior work, the authors developed these risk factors, although definitions may vary across the literature. The risks of infrastructure management (dotted line) have been derived from our data collection and analysis from our empirical work. In the interviews we have explicitly addressed these risks. We conclude that the risk profiles of application development and infrastructure management in offshore outsourcing relationships are different. The critical risks in infrastructure management are rotating onshore resources, infrastructure, knowledge transfer, geopolitical and the length of the contract. We elaborate on the risk-related findings next. The two most dominant characteristics of application development are the degree of interaction and the Table 5 Risk Profiles of Application Development (line) and Infrastructure Management (dotted line) in Offshore Outsourcing Relationships Offshore outsourcing: delivery and process risks Cultural Language and communications Different time zones Managing scope changes Human capital Rotating onshore resources Infrastructure Security and privacy Knowledge transfer Understanding of business processes of Service Recipient Geopolitical risk Size of the offshore outsourced IT service Length of the contract = infrastructure management Risk profile application = development limited moderate strong 138 European Management Journal Vol. 23, No. 2, pp , April 2005

7 dynamics of the requirements of the service provisioning. These characteristics have a high impact on cultural risk, language and communication risk, different time zones risk and on managing scope changes risk. As application development has a higher degree of interaction and more dynamic requirements, these risks are higher in application development than in infrastructure management. The risks in application development are defined as strong. Unpredictable changes in application development require an immediate high degree of interaction between the service recipient and the service provider. In infrastructure management, the risks are defined as limited, except for the risk managing scope changes. The impact of scope changes in infrastructure management is substantial in most cases. Key elements in infrastructure management such as servers, LANs and WANs are mostly tightly interlinked. It is impossible to change a single element in the infrastructure without affecting other elements. By contrast, with application management most changes in infrastructure management are predictable. This enables ex ante preparation and planning of change implementation. The risk labelled as human capital is linked to the relationship between labour costs and the total cost of service provisioning. With application development, the labour costs are relatively higher than with infrastructure management. Therefore this risk is strong in application development and limited in infrastructure management. The degree of risk associated with rotating onshore resources is opposite to the risk of human capital and linked to the type of service characteristic. This risk in application development is limited because of the duration of most application development projects. Allocating resources to projects for a period of up to twelve months is less than allocating resources to continuous services for a period of up to 36 months. Therefore this risk is defined as limited in application development and strong in infrastructure management. The infrastructure risk is linked to the service level and investment characteristics. In infrastructure management, most service levels are continuous. Therefore, the reliability of telecommunication and data infrastructure has to be at a high level. Also, most investments in hardware are dedicated investments. While on demand and utility service provisioning is on its way, these concepts are mainly marketing concepts at present (Currie, 2004). Therefore this risk is defined as strong for infrastructure management. It is limited for application development as there are only project deliverables, which do not require 24/7 availability of infrastructure. Also, the generic investments are limited to the certification service delivery processes in application development. The security risk is very limited in application development as 24/7 data communications are not required (contrary to infrastructure management). The service levels in application development are based on project deliverables, meaning the completion of the software. Usually, software is directly installed on the hardware of the service recipient. Therefore this risk in application development is defined as limited. In infrastructure management it is defined as strong due to 24/7 data communications and the continuous service levels. Knowledge transfer risk in infrastructure management is strong as there is more than one service delivery unit involved in the service provisioning. The transfer of knowledge is a daily internal transfer of knowledge from one shift to the next shift within the service recipient organisation. The following the sun concept 2 seems more applicable to infrastructure management than application development. Knowledge transfer is a strong risk in infrastructure management due to the high frequency of knowledge transfer and the time criticality of continuous services levels. In application development, commonly a single service delivery unit is involved in the service provisioning. Knowledge transfer is mainly an external process between the service recipient and provider concerning specifications of the required services. It impacts the project planning. Due to the dynamics of these requirements this risk is qualified as moderate. The need to understand the business processes of the service recipient is most relevant to application development. Requirements of service delivery are closely linked to business processes. Therefore, this risk is defined as strong for application management. In infrastructure management there is limited need to understand the business processes of the service recipient. The requirements of the service delivery are mostly technical requirements, such as uptime of servers, service windows of the helpdesk, etc. Therefore it is defined as limited for infrastructure management. Geopolitical risk is important for determining the preferred offshore location in the vendor selection process. Geopolitical risk in the delivery and process is linked to the risk of the length of the contract. As there are substantial specific investments in longterm offshore engagements in infrastructure management, the risk of the length of the contract is strong in infrastructure management, contrary to the case of application development. This implies for geopolitical risk that the interests of the service provider have to be ensured for a longer period of time. Size of the contracted services is related to the type of services. Only services with a substantial size are worthwhile for considering the offshore option. As the additional costs for implementing proper communications have to be taken into account, this risk European Management Journal Vol. 23, No. 2, pp , April

8 is strong in application management and limited in infrastructure management. Length of the contract is related to the specific investments. Specific investments in application development are limited. Most of the expenses can be charged to the project. The duration of the contract period is relatively short. In infrastructure management, investments in hardware, tooling and processes for a specific contract are substantial. Therefore, risks in application development are limited and risks in infrastructure management are strong. To conclude, the risk profiles of application development and infrastructure management in offshore outsourcing relationships differ in terms of strength per risk category. For infrastructure management, critical risks are rotating onshore resources, infrastructure, knowledge transfer, geopolitical and the length of the contract. As a result of the differences in risks between application development and infrastructure management, different strategies have to be implemented in offshore outsourcing of infrastructure management. In the next section, we focus on risk mitigation strategies that address critical risks identified in our research since these have the strongest potential to jeopardise the success of infrastructure management offshore outsourcing contracts. Risk Mitigation Strategies for Offshore Infrastructure Management Service providers have to implement risk mitigation strategies to ensure service delivery in offshore infrastructure management. These strategies describe ways of working and best practices in infrastructure management in offshore outsourcing partnerships. Our research findings suggested six strategies. Table 6 shows the contribution of the six strategies towards dealing with the five critical risks associated with infrastructure management. This mapping is based on our case study research and expert interviews. The characteristics of each strategy are elaborated next. Global Certified Processes As in offshore application development, certified processes are essential to high quality delivery of infrastructure management services. ISO and BS9977 certification are most relevant to infrastructure management in offshore outsourcing relationships. Certification of the service provider was an important requirement of service recipients in our case studies. A business manager (case 2) stated that: The absence of certified service delivery processes was a knock-down criterion in our selection process. In order to offer infrastructure management it is essential that all data centre locations of the service provider are certified to ensure global end-toend service delivery. He mentioned: The number of service providers with global certified process is growing but still limited. Global certified processes enable communication between IT professionals at the service provider. IT professionals in all the involved countries followed uniformly defined processes. Global certified processes also support the communication with the service recipient. This is because the service recipient s processes such as change management processes are closely linked to the service provider processes. Global Tooling Global tooling is necessary to take full advantage of offshore outsourcing. It supports consistent and cost effective service provisioning. A service provider representative involved in the service delivery in case 2 mentioned: Our standardised ITIL based global tooling supports our following the sun offering out of India, Eastern Europe Poland and Hungary and Brazil. By using global tooling our IT specialists are able to deliver all the services during daytime. Furthermore, facilities in other time zones can temporarily take over the service provisioning in case of an emergency or the occurrence of geopolitical risks. A representative of the case 2 service recipient stresses: Business continuity is key for us. Similarly, interviewees of case 1 have confirmed the need for global tooling to ensure business continuity. Table 6 Risk Mitigation Strategies in Infrastructure Management in Offshore Outsourcing Partnerships Risk Mitigation Strategies in Infrastructure Management in Offshore Outsourcing Partnerships Rotating onshore resources Critical Risks in Infrastructure Management Infrastructure Knowledge transfer Geopolitical Length of the contract 1. Global Certified Processes X X X 2. Global Tooling X X X 3. Communication Facilities X X X 4. Reliable Local Partners X X X 5. Standardised Service Levels X X 6. Contract Management X X 140 European Management Journal Vol. 23, No. 2, pp , April 2005

9 Global implementation of the same tools promotes rotation of service provider staff. Adding successors to a team of IT professionals is not difficult when the service provider uses global tooling. Also, knowledge transfer is enabled by the uses of global tooling. Each IT professional is qualified to use global tooling for all the service recipients of the service provider. The transfer of the execution of service provisioning in case of the occurrence of a geopolitical risk is made possible by using of global tooling. Communication Facilities Communication facilities are key to service provisioning in offshore infrastructure management. Most service providers have dedicated communication facilities for providing services to all their customers. A representative of service provider, case 2: We have leased lines including spare capacity from X global telecommunication company to ensure business continuity. Also in cases 1 and 3 the service provider uses its large customer base to leverage purchased bandwidth. Expert 3 adds: Due to global overcapacity in communication facilities I expect that communication facilities are no longer a bottleneck in offshore outsourcing relationships. In sharing communication facilities, specific investments can be avoided, impacting the length of the contract as well. Also, geopolitical risk can be reduced. In case of unstable circumstances in the service delivery area, offices of the Service Provider in other geographical areas can possibly take over parts of the service delivery. Still, there is a decreasing number of service recipients preferring dedicated communication facilities for security or obligatory regulation reasons such as the Sarbanes-Oxley Act, IFRS or IAS. As the costs of communication decrease year-by-year, service recipients requiring dedicated communication facilities are potential candidates for offshoring infrastructure management. Reliable Local Partners In infrastructure management in offshore outsourcing relationships, most of the contracts include challenging output-based service level agreements. Therefore, incidents that cannot be solved remotely have a potentially significant impact on meeting contractual requirements. Local presence of staff from the service provider or a local partner is essential but nevertheless very limited only 1% of incidents, as indicated by the interviewees and experts. This 1% of incidents cannot be solved remotely, for example due to a non-functioning network connection or a failure of the insight card of a server. A service manager of a service provider case 2 adds to this: We make a trade-off between the costs of managing local partners and the costs of flying in our HQ-based technical crew. But sometimes the service levels are so business critical that there is no time to fly in our technical crew. Reliable local partners are sometimes the only feasible option. In many cases it is also more cost effective to work with a local partner acting on behalf of the service provider. The mutual obligations are detailed in back-to-back agreements. In co-operating with local partners, specific investments can be done jointly, impacting the length of the contract as well. Also, geopolitical risk can be reduced. In case of unstable circumstances in the service delivery area, local partners based in another geographic location can possibly take over parts of the service delivery. Expert 1 commented: An important point has to be made; these local partners are not always small local service providers. In most offshore outsourcing partnerships the local partners are multinationals, mainly hardware vendors such as Dell or HP. Alliances and partnerships are common best practice in offshore outsourcing. While most Service Providers have a geographical strength, only a few have a truly global coverage. Standardised Service Levels In order to manage offshore infrastructure management engagements effectively, service levels have to be aligned for different service recipients in order to manage the contracts effectively. The effort to manage a large number of different service levels for the service provider is substantial. This had induced service providers to offer a standard service catalogue with different types of service levels. For the recipient, applying the service provider s standard service level is usually the most cost effective choice. The next step is offering services based on predefined sets of services. This often takes the form of so-called service menus which contain options for service configuration and levels. The transfer of knowledge in the standardised service provisioning is very efficient and effective. The reference points for the IT professionals in providing the services are equal. Specific investments in implementing the service provisioning, such as writing operations manuals for the service delivery, are significant lower. Therefore, the risk of the length of contract is lower as these investments are smaller. Expert 2: An interesting observation is that first procurement departments of service recipients contract IT services from Service Providers. And second, the contracted IT services are offered as a service portfolio to the divisions or business units. They select the services of choice out of the service portfolio. This observation is, of course, not limited to infrastructure offshore partnerships. But the need for standardised service levels is bigger in offshore partnerships than European Management Journal Vol. 23, No. 2, pp , April

10 in outsourcing partnerships as the service provider s effort of communication is more substantial in offshore outsourcing. Contract Management Contract management manages the back office of the service provider and is responsible for meeting the agreed service levels. Service providers have implemented contract management in both developing and developed countries. This so-called mirrored implementation of contract management is essential in infrastructure management offshore outsourcing relationships. As these engagements are in most cases a 24/7 h business, the mirrored contract management is a necessity. Business manager case 2 confirms: Having a contract manager of the service provider on site is really of major importance to us. If there is any issue he can simply knock on the door, it is only two blocks away. After we discuss the issue, I immediately take appropriate action towards my operational employees in India. This proximity promotes communication between the service recipient and the service provider and therefore reduces the risk of knowledge transfer. A contract manager as an interface is also a countertactic for the risk of the rotation of onshore people. Even if the contractual obligations are defined as services of identified IT professionals, service providers prefer a stable crew. If changing IT professionals is necessary for the service provider for whatever reason, the replacement of these IT professionals is not immediately visible to the service recipient as the contract management is the interface with the service recipient. Discussion and Conclusion Although the case studies investigated represent a limited sample, our research shows distinct and recurrent patterns of risks and mitigation strategies in infrastructure management in offshore outsourcing relationships. What can practitioners and researchers learn from these, and which areas call for further research? First, service recipients considering offshoring infrastructure management have to assess risks prior to deciding on outsourcing. The focus of this assessment will be on the strong risk categories listed in this paper: rotating onshore resources, infrastructure, knowledge transfer, geopolitical risk, and the length of the contract. Rotating onshore resources and knowledge transfer are risks that require additional attention. Based on the concept of tacit knowledge (Nonaka and Takeuchi, 1995) a framework for knowledge transfer in offshore outsourcing could be developed. Infrastructure and geopolitical risk are more technically related risks. Reliability of remote service provisioning is another topic that requires additional attention from researchers. Length of the contract is management issues which are already clearly addressed in the transaction costs theory (Williamson, 1975). In selecting a service provider, the service recipients must check the strategies (global processes, global tooling, communication facilities, reliable local partners, standardised service levels and contract management) to avoid these risks. There is also a debate whether native service providers are better equipped than foreign service providers. Because of their track record in infrastructure management we believe that native service providers are better equipped. Other writers claim the contrary. Based on limited sample Travis and Newmark (2004) highlight the superiority of Indian service providers over native service providers They argue that native service providers lack integrated global delivery models. However, our research suggests that the maturity of the global delivery models of native service providers exceeds the maturity of foreign service providers. Travis and Newmark (2004) also address the issue of knowledge transfer. There is indeed a cultural and language issue for native service providers. On the other hand, the cultural and language issue for foreign service providers is much bigger, as most foreign service providers only have sales offices in the developed countries. Our study suggests there is only one inhibitor for native service providers, which may be defined by the above authors as creating the right business model. Most native service providers have a profit and loss responsibility for each country. Therefore country managers in the developed region will not be in favour of offshore outsourcing as this impacts their revenue and profits. Guidelines of corporate management are necessary to avoid this inappropriate behaviour of their country managers in the developed region. Second, service providers have to consider whether offshoring infrastructure management complements their corporate strategy. They must assess the feasibility of recovering investments required for offering infrastructure management. The service providers must also implement the six strategies in order to ensure operational and business continuity. For service recipients and providers an important question is: How can we benefit from infrastructure management in offshore outsourcing relationships? Most service recipients face fierce competition and are likely to use offshore outsourcing as a strategy to reduce the total costs of ownership of IS/IT. Also, for service providers the impact of offshoring infrastructure management is increasing. Those not willing to offer offshore infrastructure management as part of a portfolio of global IT services may face the risk of not being able to acquire new contracts, and might gradually lose their position in the global market. 142 European Management Journal Vol. 23, No. 2, pp , April 2005

11 The impact of global tooling on offshore outsourcing of infrastructure management will increase in the near future. The primary driver for offshore outsourcing is cost effectiveness. This is primarily based on a cross-national comparison of the costs of IT labour. With infrastructure management, the percentage of the costs of IT staff is considerably lower than in application development. The costs of the IT staff in infrastructure management will decrease by the enhanced functionality of the tooling as this to some extent replaces IT labour. Therefore the cost effectiveness of infrastructure management in offshore outsourcing partnerships is likely to decrease. The Service Providers have to carefully select the labour intensive parts of infrastructure management, such as application maintenance and helpdesk. These parts of infrastructure management will remain feasible candidates for offshore outsourcing. Hardware maintenance will be provided out of the most cost effective geographical location. It results in a global sourcing service portfolio. Nevertheless, we conclude that implementing offshore infrastructure management is becoming attractive and sometimes necessary for service recipients and Service Providers alike. Technical innovations will be addressed in the foreseeable future, and concepts for knowledge transfer in offshore outsourcing engagements will be improved. This research concludes that organisations must make strategic decisions on offshore infrastructure management in order to position themselves in the increasingly global market place. Service recipients will be served by Providers from numerous geographical locations to obtain cost effective services. This will pose additional challenges to Service Providers, where it will become increasingly necessary to develop offshore outsourcing as part of their service portfolio to compete in a global IT industry. Notes 1. CapabilityMaturity Model, an approach for software process quality management. 2. This practice usually involves collaboration across three sites across the earth s 24 time zones. Work is submitted from site to site in the same direction as the sun moves. For instance, an office in Ireland receives work in the morning from an office in China, and passes on the work to a site in the Americas at the end of the working day in Ireland. References Barthelemy, J. (2003) The hard and soft sides of IT outsourcing management. European Management Journal 21, Businessline (2004a). Worth a close up: There s nothing distant about the remote management opportunity. 21st April. Businessline (2004b). Cognizant dedicated centre for infrastructure management. 17th May. Caldwell, B., et al. (2004). Market focus: Offshore infrastructure outsourcing, Worldwide, Research Report Gartner, G , November. Carmel, E. (1999) Global Software Teams, Collaboration Across Borders and Time Zones. 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12 Sinha, D. and Terdiman, R. (2002) Potential Risks in offshore sourcing. Gartner Research(5th September). Travis, L., Newmark, E. (2004). Remote Data Center Management: Low Cost and High Quality From India. AMR Research Report, November. Weill, P., Subramani, M. and Broadbent, M. (2002) Building IT infrastructure for strategic agility. MIT Sloan Management Review 44, Williamson, O. (1975) Markets and Hierarchies. The Free Press, New York. ERIK BEULEN, Information Management, Tilburg University, P.O. Box 90153, LE, Tilburg, The Netherlands. Erik Beulen is Assistant Professor at Tilburg University and International Business Development Manager with Atos Origin. He has written widely on outsourcing and offshore outsourcing. PAUL C. VAN FENEMA, Rotterdam School of Management, Erasmus University, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands. fbk.eur.nl WENDY CURRIE, Warwick Business School, University of Warwick, Coventry, CV4 7AL, UK. wbs.ac.uk Wendy Currie is Professor of Information Systems at Warwick Business School. Her research interest is in management strategy for informations systems, e-business models, IS governance and outsourcing practices. Among recent books are: The Global Information Society (Wiley) and Rethinking MIS (with Bob Galliers), published by Oxford University Press. Paul van Fenema is Assistant Professor at the Rotterdam School of Management. His research focuses on co-ordination practices, offshore outsourcing and virtual teams. 144 European Management Journal Vol. 23, No. 2, pp , April 2005